Banking Sector Turmoil

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The collapse of Silicon Valley Bank and Signature Bank as well as the volatility surrounding other regional and global banking institutions: guidance below

Banking Sector Turmoil

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March 22, 2023

With experience advising clients in every major financial crisis in the last 25 years, Dentons is uniquely positioned to help clients navigate new strategic risks that have emerged from the collapse of Silicon Valley Bank and Signature Bank as well as the volatility surrounding other regional and global banking institutions. Our cross-disciplinary team of legal, crisis communications, public policy and cybersecurity practitioners stands ready to help clients in the financial sector and those in other industries facing the broader economic implications. Answers to some of the key questions clients have asked us so far can be found below.

Please connect with your Dentons lawyer for guidance or one of our key contacts listed. Specific circumstances vary and need to be considered in delivering legal services.

Frequently asked questions

How does a depositor maximize FDIC coverage? How does a depositor mitigate uninsured risk at a bank?

A depositor is insured up to the FDIC insurance limit (currently, US$250,000) for each deposit account held by such depositor at different eligible institutions. Each of these accounts is considered a separate and distinct account for FDIC insurance purposes. For example, a depositor can have US$250,000 on deposit at Bank A and US$100,000 at Bank B. Because each of those accounts is separately insured, the depositor has US$350,000 in total insured deposits. By contrast, deposits at different branches of the same insured institution are treated as one account and subject to the US$250,000 limit. In order to maximize FDIC insurance coverage, a depositor could utilize one or more of the following options:

Deposit funds in accounts at different insured institutions, with no more than US$250,000 deposited at each institution.
Open a deposit account or CD with an institution that offers a deposit swapping network, such as IntraFi services, through which the depositor’s funds are separated into amounts below the FDIC insurance limit (US$250,000 or less) and deposited at participating insured institutions.
If available, participate in an institution’s cash sweep facility with a multibank deposit feature (as further described below), which provides that in the event a deposit nears the US$250,000 threshold, any excess balance is automatically transferred (“swept”) to another bank to take advantage of each bank’s US$250,000 FDIC insurance limit; however, please note the daily cut-off and timing considerations with respect to sweep accounts (as further described below).
Open deposit accounts with different owners:

For eligible joint accounts, the FDIC insurance limit is currently US$500,000;
For eligible revocable trust accounts with five or fewer beneficiaries, the FDIC insurance limit is currently US$250,000 for each unique beneficiary;
For eligible revocable trust accounts with six or more unique beneficiaries with equal beneficial interests, the FDIC limit is currently US$250,000 for each unique beneficiary; and
For certain eligible employee benefit plans, the FDIC insurance limit is currently US$250,000 for each participant’s interest, which is separate from any accounts the employer or employee may have at the same FDIC insured institution.

What are common types of sweep accounts, and are they covered by FDIC insurance?

A sweep account is a bank account set up to operate so that at the end of each banking day all or a portion of the funds on deposit in the account are automatically transferred ("swept") into another account. Common sweep options and their applicable FDIC insurance limits are described below.

Money Market Deposit Accounts: Funds are swept daily into an institution’s interest bearing deposit. Money market deposit accounts utilized with a sweep option may be provided by a depositor’s bank or through another bank. Funds placed in money market deposit accounts at banks are covered by FDIC insurance up to the applicable limits.
Money Market Fund: Funds are swept daily into a money market fund, a type of mutual fund that invests in debt securities characterized by their short maturities and minimal credit risk. Money market funds are securities, which are not covered by FDIC insurance.
Multibank Deposit: In the event a deposit at an institution nears the US$250,000 threshold, any excess balance is swept to another bank to take advantage of each bank’s US$250,000 FDIC insurance limit. This process is repeated up to the FDIC insurance limit set forth in the sweep option program. A number of sweep option programs provide FDIC insurance up to US$2.5 million, but as noted above, this varies among institutions.

In the event of a bank failure, determining whether “swept” funds remain with the failed bank or in investment vehicles outside of the failed bank, involves analyzing the failed bank’s normal cut-off time for the sweep option and also the cut-off point established by the FDIC, as appointed receiver, among other factors.

If I am an uninsured depositor, what happens to my loan at the same bank?

You may be able to use the uninsured deposits to offset amounts outstanding under the loan.

In the FDIC’s prior guidance¹, the FDIC provided the following:

In the case of a delinquent loan, the FDIC will “set off” the loan against the borrower’s deposits (if any) before paying deposit insurance. In the case of a non-delinquent loan, the depositor might elect to “set off” the loan against his/her deposits in order to receive full value for any uninsured funds (i.e., funds in excess of the US$250,000 insurance limit). In either case, no “offset” is possible unless the obligations are “mutual” – meaning that the borrower and the depositor must be the same person or legal entity acting in the same legal capacity.

Does a receiver have the ability to bring avoidance actions in a bank receivership under the FDIA?

The FDIA does not include provisions addressing preferences. However, when it comes to a national chartered bank the FDIC can avoid payments that prefer a creditor after the commission of an act of insolvency or are made in contemplation of insolvency under the National Bank Act. In the case of a state chartered bank in receivership, the FDIC may have the ability to pursue preference actions under state law. In addition, the FDIC has the ability to avoid a transfer or obligation incurred by an insider or debtor of the bank that occurs within five (5) years of the appointment of the FDIC as receiver if the transfer was made, or obligation incurred, voluntarily or involuntarily, with the intent to hinder, delay or defraud the bank, the FDIC or any other appropriate federal banking agency.

Can security interests be avoided when a bank goes into a receivership under the FDIA?

Security interest can be avoided if entered into in contemplation of insolvency or made with intent to hinder, delay or defraud creditors. Otherwise, the FDIA protects enforceable security interests from being avoided as long as the security agreement complies with the documentation requirements set out in section 12 U.S.C. 1821(d)(9)(A) of the FDIA.

Are there any transactions that are exempted from the avoidance provisions?

Qualified Financial Contracts (“QFCs”) are generally exempted from the avoidance provisions unless transfers were made or obligations incurred with intent to hinder, delay or defraud creditors of the bank or the FDIC. QFCs include a securities contract, commodity contract, forward contract, repurchase agreement, swap agreement, and any similar agreement the FDIC determines by regulation, resolution or order to be a QFC. Note, too, that the FDIA permits a counterparty to enforce rights under the QFC even after the commencement of the bank receivership, subject to a one day delay or after the counterparty has received notice that the QFC has be assigned to a solvent bank.